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Why is the Russian currency more valued than before the war?

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Despite sanctions imposed by the West on Russia, the ruble this week recorded its biggest appreciation against the dollar since 2020. The Russian currency still reached a high of 11% against the US currency from January to April. But it is possible that the balance will be favorable for the Russians for a short time.

The matter has generated controversy in European politics. Jordan Bardella, Acting chairman of the French conservative Rassemblement National party, he said economic sanctions were “a big mistake”.

“They are massively enriching Russia, which is profiting from this war, is making hyperprofits. The embargoes caused an explosion in fuel prices,” Bardella pointed out.

Russian government took steps to defend the ruble

Ironically, the sanctions may have temporarily contributed to the appreciation of the Russian currency. That’s because, to protect the ruble, the Kremlin imposed high interest rates on the Central Bank, forced exporters to sell foreign exchange and demanded that natural gas be sold in rubles.

As proof that the Russian economy is doing well, after the interest rate hike, the Russian Central Bank announced the second drop in less than a month. In the statement, the bank said that “the risks to prices and financial stability have ceased to increase, creating the conditions for a reduction in the key rate”. The note sent to the press further describes that “the slowdown in inflation is largely attributable to the strengthening of the ruble and the decline in consumption”.

In official announcements, Russian President Vladimir Putin repeatedly admitted that sanctions imposed by the West were creating significant difficulties. However, he also dared to say that he seized the opportunity to rebuild and diversify the economy. Russia would be increasing exports to Egypt and India.

With the rise in oil, natural gas and coal prices, the Kremlin still made billionaire gains even with what it exported in recent months to the European Union. According to the Center for Research on Energy and Clean Air, a think tank in Finland, the total Russian gain from exports was 63 billion euros during the first two months of the conflict in Ukraine. And 71% of that amount came from the European Union: European countries spent almost twice as much in 2022 as in the same period last year.

Good Russian time shouldn’t last

The ruble’s appreciation wave, however, may have its days numbered. According to International Monetary Fund (IMF)“unprecedented sanctions and uncertainties are expected to strongly affect investment and exports, as well as depress imports and private consumption in Russia”.

Furthermore, the IMF report highlights that the European desire to get rid of Russian hydrocarbons by 2027 could eliminate 60-70% of the current demand for Russian oil and natural gas in the coming years.

Economic indicators also contradict the thesis that Russia can, in the long run, get richer from the war. Gross Domestic Product (GDP) is expected to collapse this year, with projections oscillating between -8%, according to the Central Bank of Russia, and -10%, according to the European Bank for Reconstruction and Development (EBRD). At the same time, inflation is expected to jump more than 20%.

High interest rates in Russian banks also tend to limit investments by Russian companies. As a result, Putin’s strategies may begin to fail and the ruble’s good momentum is unlikely to last long.

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